Sentiment that Indonesia's bond rating could soon be upgraded to investment quality has helped fuel foreign demand for an Indonesian government Sukuk issue.

The issue is only for $1 billion but already 75% has been booked to local buyers and investors domiciled in the Middle East and Malaysia.

Sukuk are bond-like certificates that don't pay interest but where investors take an ownership stake in the project the bonds are financing and investors' coupon payments are funded through structured profit streams from that stake.

They are constructed to comply with Islamic finance rules that prohibit traditional interest payments.

They can trade at a discount, however, as they can not be covered by credit default swaps.

Positive sentiment turning towards the Indonesian archipelago is being driven by a more positive inflation outlook following release of October figures showing a 12 basis point fall.

The figures were below expectations with analysts now expecting annual inflation to keep falling and end the year as low as 4.4%, noted Mandiri Investasi in an economic briefing.

Inflation in Australia at 3.5% shows how far it has fallen in Indonesia as less than 12 months ago it was around the 7% level.

A wild card, however, could be food prices particular from flow on effects due the Thai crop failure after the recent floods. Thailand is the world's 6th largest rice producer and 5th largest rice exporter.

"Thailand crop failure due to flooding that cut down world supply of rice, coupled with declining domestic rice production will pose inflation to rice prices. Yet, the impact on inflation will remain manageable, as the government reported seeking for alternative sources from Vietnam, Cambodia and India," noted Mandiri Investasi.

The Sukuk issue is being handled by Citi, HSBC and Standard Chartered, reported Finance Asia.

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